Rent one side, live on the other side, how to make $$ from this?

Question

I recently got interested in real estate investing, so I've been roaming around bigger pockets. I've noticed that a lot of people talk about FHA 3.5% down payments on multifamily homes living in one side and renting out the other side as a start to real estate investing.

I've been doing some research and calculations on a few MFHs and I always end up being negative, therefore I'd have to help pay for a part of mortgage/fees since the person I'd be renting too isn't paying enough rent to cover everything. Here is an example of my calculations. House costs = $170,000DownPayment=$5,950 (.035*170,000)Interest rate = 5% (30years) Property taxes = $149.67 ($1,796/yr)Mortgage = $880.66 ($10,567.87/yr)Maintenance = $141.67 ($1,700/yr) Insurance = $104.17 ($1,250/yr)Vacancy = $125 ($1,500/yr)Property manager =$125 ($1,500/yr) Monthly rent = $1,250 ($15,000/yr) Total expenses = $1,526.17Total Income = $1,250Net = -$276.17 I used 10% of the income for both property manager and vacancy just to be safe. If I was to actually buy the MFH i would do the repairs by myself, so i wouldn't need a property manager, but i left it in the calculations just to see what would happen if I included it, I would still be negative even if I excluded it. Maintenance at 1% of the house value (not sure about this amount...) Insurance at $1,250/yr as a guesstimate... The tenant would pay for all utilities. I used an online calculator to do the calculations for me.

House costs = $170,000

DownPayment=$5,950 (.035*170,000)

Interest rate = 5% (30years)

Property taxes = $149.67 ($1,796/yr)

Mortgage = $880.66 ($10,567.87/yr)

Maintenance = $141.67 ($1,700/yr)

Insurance = $104.17 ($1,250/yr)

Vacancy = $125 ($1,500/yr)

Property manager =$125 ($1,500/yr)

Monthly rent = $1,250 ($15,000/yr)

Total expenses = $1,526.17

Total Income = $1,250

Net = -$276.17

I used 10% of the income for both property manager and vacancy just to be safe. If I was to actually buy the MFH i would do the repairs by myself, so i wouldn't need a property manager, but i left it in the calculations just to see what would happen if I included it, I would still be negative even if I excluded it. Maintenance at 1% of the house value (not sure about this amount...) Insurance at $1,250/yr as a guesstimate... The tenant would pay for all utilities. I used an online calculator to do the calculations for me.

So I guess my question is, how are people making money/coming out on top from FHA 3.5% down? Are they just getting super good deals? Am I doing my calculations wrong? Am I over estimating certain expenses?

Jim K. · Answer

@Dow Yang

So if your property manager is eliminated and you read and YouTube your way to doing half the basic maintenance necessary you're down to $88/month living expenses, possibly less. You're also buying yourself an excellent 1-year light-load course in basic property management and active landlording.

I'd make that commitment for a year, Dow. A year of saving and getting to your next deal. If a year's not enough, after the year is up and your commitment to live there is up, I'd move back in with my parents, give them a few hundred in rent, and pocket the rest of my positive cash flow, even if I then chose to hire a property manage and call handymen at $75 per hour to resolve minor maintenance issues.

But then again, I'm an old fart. There are much larger sacrifices I would be willing to make if I could get the chance to be a recent, broke college graduate again, knowing what I know today. For the househacking route, I'd be perfectly willing to sleep on a cot in my parents basement whenever I wasn't constrained to follow FHA guidelines.

Kerry Mertz · Answer

The idea is to decrease your living expenses (which is usually one of your biggest expenses.) This will allow you to save your income at a faster rate to be able to invest in more real estate.

Nate Monson · Answer

In my opinion (and I'm sure others have said this as well) the decision to do a house hack is actually what you should be focusing on. If you are currently renting say $1200 per month and you can decrease that expense by $1000 or more per month, the decision to go forward and make this a part of your life is actually what will be the month saver. Waiting months for the "right" property to come along will actually end up costing you more money.

In your example you are looking for something that will net you $0 at the end of the month at minimum. The decision to wait in theory should save you $276 per month, but it actually costs you money because of the opportunity cost. In this case it is the trade of really saving $924 or $276 per month (assuming your rent is $1200). If you are committed to using this strategy you are actually losing a lot of money every month thinking about what relatively is a few pennies.

All in all I think you are calculating things right, I just think you are focusing on the wrong thing. Hope it all works out for you!

Casandra M. · Answer

I won't repeat what others said - it's all great advice. I'd just like to add that you don't have to guess at the insurance rate... call up an insurance agent and get a quote, as that could improve your numbers as well. Depending on vacancy rates in your location, we just use 1 month of rent for vacancy expense for our properties, which has been a reliable figure for us for the last 4 years.

Derek Tellier · Answer

There's lots of factors that can lead to making money on a situation like this. The biggest one one being they found a GREAT, likely off market deal.
Nothing wrong with looking for those but if you look for the holy grail for too long you'll never get started.
You have to decide what numbers work for you and find a deal that fits into that.
Living for $276/month and owning a home is a bargain.
Like Jeff said, in a year or so you've hopefully saved up enough to do it again and then you collect that rent from the other side plus what you're getting on the new property and at that point you actually are cash flowing.

Best of luck

Dow Yang · Answer

@Jeff Brower @Derek Tellier

I'm just a recent grad still living with my parents for free since i don't need to pay rent. But i'm interested in getting started in the investing scene and was trying to analyze this deal and essentially see if it was worth to move out.

Only paying 276 for rent would be very nice if i do move out though, so i cant really complain there.

I'm assuming that the posts/blogs where people say they end up making money is because they have a really good deal on a MFH then?

Jeff Brower · Answer

Here is a link to my duplex story with similar numbers:

https://www.biggerpockets.com/forums/223/topics/645825-my-first-duplex-fha-house-hack-case-study-with-tips

Derek Tellier · Answer

@Dow Yang

Are you currently renting or do you own a single family?
How much are you currently paying in Rent/Mortgage payment?
Factor that in.
Lets for simplicity assume you're paying $800/month in rent, in your scenario above you're only paying $276 saving over $500/month. While that may not look like cash flow its $500 more a month in your bank account then you currently have.

Factor in you self managing as you mention and you're definitely saving $ over your assumed current situation.

Jeff Brower · Answer

You have to compare your payment to what you would be paying if you were renting a similar place. If you're paying $276, but otherwise would be paying $1250 if you were renting the space, then you are way ahead. The advantage is that you can move out after one year and rent both sides, then you will be in the black. The numbers you gave are pretty similar to the duplex I bought this summer. I am very happy to have these numbers.

Rent one side, live on the other side, how to make $$ from this?

Rent one side, live on the other side, how to make $$ from this?

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